1. Assume you want to price a call on a stock that has the price of $35 today. The option matures in one year and has the strike price of $34. Assume the stock price is equally likely to go up by 10% or down by 10% in one year, and you plan to use a one step binomial tree to price the call option.

What is the hedge ratio (in decimal format, use 5 decimal places)?

2. If while valuing a put option using a binomial tree you find a hedge ratio=3/5 is necessary, what does this mean should be in our portfolio to have a riskless gain in either state of the world?

1. It means that you should buy 3 stocks and buy 5 calls
2. It means you should buy 3 stocks and buy 5 puts
3. It means that you should buy 3 stocks and short 5 calls
4. It means you should buy 3 stocks and short 5 puts